News

01.01.2016

On Ukraine’s Payment Default

On Ukraine’s Payment Default

January 1st,
2016. The Ministry of Finance of the Russian Federation notes that Ukraine has
failed to make payment in the amount of nominal value and final coupon of the
Eurobond held by the Russian Federation totaled US$3,075 billion as of the
expiration of the grace period on 31 December 2015. Ukraine is now legally in
payment default on the Eurobond.

As a consequence of
Ukraine’s payment default, the Ministry of Finance of the Russian Federation
has initiated procedures with The Law Debenture Corporation plc who is
designated as the Trustee for the Eurobond with a view to commencing legal
proceedings as soon as possible. A formal legal complaint against Ukraine will
soon be filed in an English court.

Thus, Ukraine has chosen
to default rather than to negotiate in good faith. Ukraine has never responded
to the proposals made by the President of the Russian Federation at the G20
meetings in Antalya in November 2015, to extend the repayment of the Eurobond
over a three year period. Ukraine has never made any proposal that recognizes
the Eurobond as an official sector credit. Instead, Ukraine voluntarily
included in its new private sector bonds a so-called “most favoured creditor”
clause that effectively prohibits it from repaying the Russian Federation’s
Eurobond or offering any alternative terms that are consistent with the
Eurobond’s status as an official credit. This self-imposed constraint cannot be
used by a sovereign debtor as an excuse for the failure to negotiate in good
faith, still less as any legitimate basis for suggesting that Ukraine is unable
to comply with its legal obligation to repay the Russian Federation.

In contrast, the Russian
Federation has always been willing to consider contributions consistent with
the IMF-sponsored program for Ukraine. The Russian Federation would carefully
examine any meaningful proposal from Ukraine and believes
that the commencement of legal proceedings does not preclude a constructive
dialogue with a view to reaching an acceptable solution.

Unless Ukraine changes
its position and begins to negotiate in good faith, the IMF Executive Board would
not have any other option than to consider whether funding Ukraine would be
permissible under Extended Fund Facility Arrangement with a view to inconsistency
between actual state of affairs and the new policy on non-tolerance of official
sector arrears. Under the current circumstances, there are obvious concerns
that lending into Ukraine’s arrears would send a discordant signal to all
official sector creditors.